Is a Credit Cap Bid in Your Future?

In a much criticized decision, a bankruptcy court in Delaware recently held that cause existed to limit a secured creditor’s right to credit bid its claim at the amount it paid to purchase the claim.  In re Fisker Automotive, 2014 WL 210593 (Bankr. D. Del. 01/17/2014).

Fisker, involved in green energy, manufactured electric vehicles financed with assistance of the US Department of Energy.  It was the victim of safety recalls of battery packs, loss of inventory from Hurricane Sandy, and the loss of its credit facility from the DOE.  It filed chapter 11 to sell all of its assets to Hybrid Tech Holdings, LLC (Hybrid).  Hybrid purchased DOE’s loan facility and claim of $168.5 million for 15 cents on the dollar.  Fisker proposed a sale of its remaining assets to Hybrid Tech for a $75 million credit bid.  The Creditor’s Committee objected to the credit bid and requested an auction which would involve another proposed bidder.

The bankruptcy court addressed two questions: (1) whether Hybrid was entitled to credit bid its purchased claim and (2) if so, may the court limit or cap the amount that Hybrid may credit bid.  The bankruptcy court found that Hybrid could credit bid under 11 U.S.C. § 363(k) but the right could be limited based on cause.  The court firmly determined there was no absolute right to credit bid where the lender had engaged in inequitable conduct, where public policy required ensuring successful reorganization, or limiting the right to credit bid fostered an environment conducive to competitive bidding.

The evidence was clear.  If Hybrid was allowed to credit bid the full amount of its claim there would be no auction of the debtor’s assets. Other potential bidders testified they would not bid in the face of an unlimited credit bid by Hybrid.  Fisker also sought an expedited sale process during the holidays which was “troubling” to the court.  Finally, the Committee questioned the validity of Hybrid’s secured position.  Based on the unique facts presented, the court found cause to deny Hybrid’s request to credit bid the entire amount of its claim and limited its maximum allowable credit bid to $25 million.

Lesson learned: Fisker should not be taken to mean all credit bids will be limited to the amount paid for the claim, although it will likely be trotted out by competing interests as authority to limit aggressive attempts to sell assets.  The court’s decision was based, in part, by the uniqueness of the facts presented.  Ultimately, the facts of each case will be instructive and the methodology of the proposed bidding process and its impact on potential participants will be determinative.